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Oil and Gas Rigs Pulled US Rig Count in Different Directions

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US oil and gas rig counts

According to Baker Hughes (BHI), in the week ended November 13, 2015, the total US rig count added two crude oil rigs but lost six natural gas rigs. This week represented the first rise in crude oil rig count in 11 weeks. The natural gas rig count trend seems uncertain.

In the 12 months ended November 13, 2015, the total US crude oil and natural gas rig count fell by 1,161, or 60%. The number of active oil rigs fell by 1,004, or 64%. The number of natural gas rigs fell by 157, or ~45%, over this period.

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Why rig count trends matter

Oil and gas rig counts tell us how many rigs are actively drilling for oil and gas. Analyzing the change in the number of active rigs can help us understand how long-term supply could evolve. Oil and gas rig counts signal how confident producers are about drilling for oil and gas.

Rising rig counts could indicate a potential rise in supplies in the months to come. In contrast, falling rig counts point to a potential stagnation in supplies.

Impact on energy companies

The 60% fall in active rigs over the past year indicates a fall in exploration and production activity by upstream oil and gas companies. Falling natural gas rig counts over the past year would negatively affect providers of natural gas compression services such Archrock (AROC).

The falling trend over the past year would also have a negative impact on Nabors Industries (NBR) because it provides drilling and rig services as well as completion and production services. Drill equipment makers such as Schlumberger (SLB), National Oilwell Varco (NOV), and Halliburton (HAL) also suffer when rig counts fall. Schlumberger forms 19.8% of the VanEck Vectors Oil Services ETF (OIH).

A lower rig count reduces revenue for companies that provide oil field services as upstream companies reduce exploration and production activity, pushing oil field service companies to take lower contract terms or day rates to save on costs.

Lower crude oil and natural gas production could also negatively affect midstream energy MLPs such as Williams Partners (WPZ), Energy Transfer Partners (ETP), MarkWest Energy Partners (MWE), and Enbridge Energy Partners (EEP) due to lower volumes.

In the next part of this series, we’ll take a deeper look into the impact of lower rig counts.

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